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Oil Prices Drop As Saudi Arabia Stays Pat on Oil Production

By Travis Hoium - Dec 22, 2014 at 1:55PM

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Saudi Arabia won't give in on oil production, which could mean a continued drop in oil prices.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Oil prices have slid in early trading today because Saudi Arabia came out strongly against cutting its own production. Early Monday, the price of WTI crude had fallen 2.5% to $55.70, and Brent crude was down 1.7% to $60.32, both down nearly 50% from their highs during the summer.

A drilling rig in Appalachia. Image source: Meredithw via Wikimedia Commons.

So what: Saudi Arabia's oil minister Ali al-Naimi said his country would not cut production no matter how low the price of oil goes. He said, "it is not in the interest of OPEC producers to cut their production, whatever the price is." He went on to say that even if oil goes to $20 per barrel, they would keep production where it is.  

Now what: This is terrible news for U.S. shale producers like Whiting Petroleum, Continental Resources, and Hess Corporation, which together own a large majority of acreage in the Bakken shale play. They can't economically drill new wells for anywhere near $20 per barrel. If OPEC isn't going to give in on production, shale producers will likely have to, just because they have higher costs than many producers.  

Short term, I think there's a lot more pain coming in oil markets because someone has to cut supply for the market to return to balance. As we stand today, inventory keeps building, which will put downward pressure on prices. Small shale producers are in the worst position because they're tied to their investment in newer shale plays, which may not be economical in coming years. This is an area I'd stay away from, and if you are looking to invest in the oil market at depressed prices, it's service providers, not explorers, where the safer bets can be found.

Travis Hoium has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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